Could an Illinois resident subtract a qualified profit-sharing-plan distribution from Illinois income when converting it to a Roth IRA?

Plain-English summary

A distribution from a qualified IRC Section 401(a) profit-sharing plan could be subtracted from Illinois adjusted gross income whether or not it was rolled into a Roth IRA. The Department reasoned that a qualified plan's distribution would enter federal adjusted gross income under IRC Section 402(a) or (c), bringing it within the Illinois subtraction in Section 203(a)(2)(F).

The conclusion was conditional because the requester provided no details proving the plan was qualified. The Department also said the quoted language in Publication 120 was poorly worded. Its separate discussion of an IRA converted to a Roth IRA concerned Section 203(a)(2)(W), which addressed amounts included in federal income under IRC Section 408A(d)(3).

What this means for you

Confirm the source plan's federal qualification and the Code section under which the distribution enters federal adjusted gross income. Do not rely only on the words "Roth conversion" or a general publication sentence; the Illinois subtraction cited in this GIL depended on the distribution's statutory path.

Common questions

Q: Did the rollover to a Roth IRA destroy the Illinois subtraction?
A: No, if the distribution came from a qualified Section 401(a) profit-sharing plan and was included under IRC Section 402(a) or (c).

Q: Did the Department confirm that the requester's plan was qualified?
A: No. The requester supplied no plan details, so the Department stated the result conditionally.

Citations and references

• 35 ILCS 5/203(a)(2)(F) and (W)
• IRC §§ 401(a), 402(a), 402(c), and 408A(d)(3), as discussed in the GIL
• 86 Ill. Adm. Code 1200.110(b) and 1200.120(b), (c)

Subject

Subtraction Modifications — Pensions

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2015/it-15-0008-gil.pdf

Original ruling text

IT 15-0008 GIL – 8/4/2015 – Subtraction Modifications – Pensions
Distributions from a qualified profit-sharing plan under IRC Section(a) may be subtracted
from adjusted gross income whether or not rolled over into a Roth IRA.

August 4, 2015

Re:

Rollovers of Profit Sharing Plan Distributions to Roth IRAs

Dear Mr. XXXX:
This is in response to your letter dated July 29, 2015, in which you request a letter ruling. The
nature of your request and the information you have provided require that we respond with a
General Information Letter, which is designed to provide general information, is not a statement
of Department policy and is not binding on the Department. See 86 Ill. Adm. Code 1200.120(b)
and (c), which may be found on the Department's web site at www. tax.illinois.gov.
In your letter you have stated the following:
I have reviewed Publication 120, but do not find an answer to my question.
I have a client who is an Illinois resident. He is a participant in the COMPANY
Profit Sharing Plan from COMPANY Inc. He has $100,000 in his account. He
desires to convert his account to a Roth IRA. He will claim the $100K on his
Form 1040 in 2015, and pay the income tax on that amount.
My question is whether this conversion is subject to Illinois Income Tax.
Publication 120 says “you may subtract an IRA, including amounts rolled over to
a Roth IRA”. However, it is not clear whether a rollover to a Roth from another
type of plan is also an exclusion. If you convert a distribution from a profit
sharing plan, or a 401(K) plan, is that also excluded from Illinois state Income
tax?
Response
Section 203(a)(2)(F) of the Illinois Income Tax Act (35 ILCS 5/203) provides that, in computing
his or her base income, an individual may subtract from federal adjusted gross income:
An amount equal to all amounts included in such total pursuant to the provisions
of Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408 of the Internal
Revenue Code, or included in such total as distributions under the provisions of
any retirement or disability plan for employees of any governmental agency or
unit, or retirement payments to retired partners, which payments are excluded in
computing net earnings from self employment by Section 1402 of the Internal
Revenue Code and regulations adopted pursuant thereto.

Your letter does not provide any details of the profit sharing plan. However, if it is a qualified
profit-sharing plan under Section 401(a) of the Internal Revenue Code, distributions from the
plan would be included in adjusted gross income of the beneficiary under Sections 402(a) or (c),
whether or not the distribution is rolled over into a Roth IRA, and would therefore be subtracted
under Section 203(a)(2)(F) of the Illinois Income Tax Act.
The provision in Publication 120, Retirement Income, quoted in your request is poorly worded.
That statement refers to Section 203(a)(2)(W) of the Illinois Income Tax Act, which allows the
subtraction of amounts included in adjusted gross income as the result of a conversion of an IRA
to a Roth IRA. Compare the provision on page 5 of Publication 120, in the section entitled,
“What must I attach to my Form IL-1040 when I subtract retirement income on Line 5?”, which
expressly refers to conversions of IRAs to Roth IRAs. Section 203(a)(2)(W) was added to the
Illinois Income Tax Act because conversions are included in adjusted gross income under
Section 408A(d)(3) of the Internal Revenue Code, rather than Section 408 of the Internal
Revenue Code, and therefore could not be subtracted under Section 203(a)(2)(F) of the Illinois
Income Tax Act.
As stated above, this is a general information letter which does not constitute a statement of
policy that applies, interprets or prescribes the tax laws, and it is not binding on the Department.
If you are not under audit and you wish to obtain a binding Private Letter Ruling regarding your
factual situation, please submit all of the information set out in items 1 through 8 of Section
1200.110(b). If you have any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax